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Unfair and Inequitable Business Practices

Financial Industry Regulatory Authority (FINRA) rules provide that financial advisers and their firms have a fundamental responsibility for fair dealing with customers. More particularly, FINRA Rule 2010 is captioned “Standard of Commercial Honor and Principles of Trade.” It provides: “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” Virtually every customer account agreement contains a clause in which the firm agrees to be bound by FINRA rules. Thus, firms are bound by contract (as well as by FINRA rules) to treat customers fairly and equitably. Conduct that violates FINRA Rule 2010 and causes damage is compensable in FINRA arbitration, even if other FINRA rules and applicable law are not violated.

Clearly, Rule 2010 is violated by unlawful conduct, such as fraud and deceit, churning, making unsuitable recommendations, misuse of customers’ funds, causing the execution of unauthorized transactions, and sending confirmations in order to cause a customer to accept a transaction not agreed upon. The duty of fair dealing extends beyond merely refraining from legal violations, however. FINRA Rule 2010 is an ethical standard that goes beyond legal rules.

Examples of conduct that has been found to be an unfair and inequitable practice in violation of Rule 2010 include:

Various forms of self-dealing, including imposing charges on a customer that are inconsistent with those outlined in the account agreement; entering into a transaction with a customer in a security at a price not reasonably related to the current market price of the security; and charging a commission which is not reasonable;

Failing to make certain disclosures to customers, such as disclosing that variable contracts purchased for tax-deferred plans provide no additional tax benefit to the purchaser;

Failing to give customers affirmative notice and obtain their consent before transferring their account(s);

Making abusive or repeated telephone calls to customers;

Bringing vacatur motions for the purpose of delaying payment of an arbitration award; and